Question
A client of yours wants to buy USD 225 million of the 5-year Treasury bond at the next Treasury auction, but they are concerned about
A client of yours wants to buy USD 225 million of the 5-year Treasury bond at the next Treasury auction, but they are concerned about a decline in the price of the bond if interest rates increase. (a) Design a swap hedge to meet your clients needs and specify the following terms of the swap: The swap rate. Whether the swap is a payer or a receiver. The notional amount of the swap. The tenor of the swap. The payment frequency of the swap. (b) Briefly explain the mechanics of how the swap hedges the bond to your client. Include the dollar duration and convexity of the bond plus swap portfolio in your explanation.
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